Senior Finra officials have started to tell broker-dealer executives and representatives that they should think twice when selling Section 529 college savings plans.
In a Finra compliance meeting in Fort Lauderdale, Fla., last Thursday, Andrew A. Favret, a regional chief counsel for the group based in New Orleans, warned brokerage executives that it was a registered rep's responsibility to watch over the money managers in 529 plans, according to Stephen Facella, a branch manager with Capital Guardian LLC, who attended the meeting. Capital Guardian is based in Belmont, N.C.
Mr. Favret told executives they needed to determine whether target date 529 funds “were shifting their allocations fast enough to meet the desired time frame” of when the student was going to college, said Mr. Facella.
The bottom line of the meeting was to warn broker-dealers strongly to do their due diligence when selling 529 plans, Mr. Facella said.
Finra, the Financial Industry Regulatory Authority Inc. of New York and Washington, is not telling reps and the industry not to sell 529 plans, said Nancy Condon, a spokeswoman for the self-regulatory group.
Brokers must be aware of the promises that 529 plan sales and marketing materials make, she said, adding, however, that she did not know of any Finra inquiries into potential sales abuses involving 529 plans.
Another compliance executive who was at the meeting, and asked not to be identified, said Finra officials also urged broker-dealers and reps to think of the ramifications of selling an out-of-state 529 plan versus an in-state plan.
A number of states give tax breaks for investors who use in-state plans.
Finra issued an
alert to investors as recently as January about the college savings plans.
College savings plans suffered badly in the market downturn.
In 2008, many plans “were overly aggressive with their investment strategies as students approached college, and plans stayed loyal to strategies that just weren't working,” Greg Brown, an analyst with Morningstar Inc. of Chicago, wrote in April.
Morningstar annually rates the best and worst 529 plans.
The fund industry and Finra have been
knocking heads of late.
Last month, the Investment Company Institute of Washington and ETF firms began to push back against the regulator, following its warning to brokers that inverse and leveraged exchange traded funds “typically are unsuitable for retail investors” who hold them longer than a day.
Also, target date funds have drawn scrutiny and are ripe for regulation — a conclusion made abundantly clear at a joint Department of Labor and Securities and Exchange Commission hearing in June dissecting these popular retirement funds.
But exactly how regulators will attempt to rein them in is still an open question, according to experts and others who testified.
